Square - Risks
Whenever I’m extremely bullish on a stock (see my memo from yesterday), I like to think through the bear case as well.

Stocks are inherently risky, and earning a return is never a sure thing. That’s why there’s a “risk premium” with stocks, because you very well could lose your money. Here are the reasons why Square could fall flat on its face.

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(Animation Credit: Me, created in Sketch and giphy)

Too Expensive

  • Shares have more than quadrupled since March
  • The stock has outpaced fundamentals

Too Late

  • The stock has already done an 18x since it went public at $9 in 2015. You missed it.
  • From here on out it’s higher risk and lower reward.

Too Much Hype

  • Ideas about what Square could be in the future are over-emphasized. Execution in the now is what matters.
  • Gross Payment Volume ($22.8 billion in the second quarter) is 15% below the second quarter of 2019.

Too Much Competition Now

  • PayPal’s Venmo is more popular than the cash app for consumer to consumer payments.
  • The online payment processing space is filled with competitors: Stripe, Adyen, Braintree, Shopify, Shopkeep, Lightspeed, there are a lot more.

Too Much Competition in the Future

  • Visa or MasterCard could leverage their data and scale to start offering similar consumer lending products as the cash app.
  • Apple could come out of nowhere and partner with a bank and start offering financial services. They would immediately have scale and own distribution. Apple pay has been chugging along well. This could happen.

Too Much Pain

  • Square’s seller ecosystem is made up of small and medium sized businesses, many of which are suffering right now and won’t open back up after the pandemic.
  • Square's loan book is not looking good either. In March they had to completely suspend facilitating loans to sellers other than Government PPP loans. Thats not good for a segment that has historically been a significant component of Square's subscriptions and services revenue.
Eric Pelnik's avatar
Still a great company that has pretty diverse product offerings - post election if it corrects a bit I'm heavily considering starting to build a position here
Nathan Worden's avatar
Yep, I'm thinking of adding this to my "future kid who doesn't exist yet" portfolio. Long term I like it a lot.

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